Forecasting using Macroeconomic Tools

Introduction

This paper is written to show the tools that are used in forecasting and how resourceful forecasting can be to the development of a nation using the forecasting tools. The macroeconomic tools used for forecasting can also be used to effectively depict the economic climate of a nation and also be used to assess the progress of a nation based on the economic goals previously set and also forecasts from the past to the present. This paper will attempt to predict the future of a nations economic climate using a number of macroeconomic tools namely: the real Growth Domestic Product (GDP) growth rate, the rate of inflation, the rate of unemployment and also the rates of interest based on 5 year fixed mortgage rates.

The nation of choice that has been selected for study and that will be used to predict the outcome in Canada, one of the leading economies in the continent of North America especially due to its past and present economic performance on the global scene. The paper will forecast the variables mentioned above for a range of period covering 5 years, that is, from 2014 through 2018.

Background and History of Canada

What is presently known as Canada was formed by the coming together of four provinces? This was preceded by the coming together of three British North American colonies through a process of confederation. However, long before this in the 15^th century, the was the settlement of the Britons and the French on the Atlantic coast of what is presently Canada. Upon this settlement, the expeditions by the French and the Britons led to the colonization of masses of territory in North America, but around 1756 a war broke out between the French and the Britons that lasted for seven years.

This ended in the defeat of the French and all the North American colonies were taken by the British including present-day Canada. From 1763 to 1867 Canada was under British rule and it was now a colony of Britain (Easterbrook, 2001). After the 1867confederaton the constitution of Canada was still under the control of the parliament of Great Britain until 1982 when it came under the management of the Canadian government.

Canada was not a member of General Agreement on Tariffs and Trade (GATT) which was transformed into the World Trade Organization in 1993 but became a member of WTO on January 1, 1995 (Easterbrook, 2001). The nation of Canada is reputed to be the 11^th largest economy in the world being a member of the G8 and one of the wealthiest nations. The nation has experienced a spell of tranquillity in the economy besides the effects of the global recession that was recently experienced.

The growth rate of real Gross Domestic Product (Real GDP) per person

The gross domestic product can be defined as the total market value of all the final goods and services produced by an economy in a given period of time (Samuelson,2005). In other words, it is a measure of an economy’s total output. On the other hand, the real GDP per person, also known as the per capita GDP, is calculated by measuring an economy’s total output divided by the number of people in the country and is, therefore, an indicator of the standards of living of the people in the country.

It is also known as per capita Gross Domestic Income (GDI). the GDP or GDI is an important economic indicator in the sense that it incorporates the gross investment, government spending, the exports and imports and the private consumption of the citizens of a country. The predictions will, therefore, serve to check the levels of expenditure of the government and also the private investments of the citizens. Since it also includes the net foreign exchange, it may also affect the patterns of imports and exports in the nation.

The inflation rate

This can be defined as the rate by which the general price levels of goods and services in the market is rising and consequently leading to a fall in the purchasing power of the currency of a nation over a certain period of time (Samuelson, 2005). This means that as the rate of inflation increases each unit of a currency can now only purchase a lesser quantity of goods or services than it could previously purchase.

Economists argue that a growing economy needs an optimum rate of inflation so that it can maintain its steady growth. A forecast of the inflation rate will determine the patterns of purchasing and the habits of purchasing amongst the people of the nation. For example, if the forecast predicts that there is going to be hyperinflation, the purchasing power of the local currency may severely be reduced thereby causing the people of a nation to lose trust in their own currency and they will, therefore, prefer to use foreign currency in the trades.

The unemployment rate

This is defined as the percentage rate of the total labour force in a nation that is willing and able to work but is unemployed (Samuelson, 2005). In determining this rate the workforce that is considered is the unemployed but actively seeking employment workforce. In the event that the forecasts predict that in the near future, the unemployment rates will increase the citizens of a nation will either seek employment beyond the borders of the country or seek for alternatives such as self-employment. On the flip side, high rates of unemployment may lead to increased levels of insecurity and this would mean that the necessary authorities should be prepared to deal with any eventualities as a result of this.

Interest rates

Mortgage rates are the rates that are charged upon every mortgage and they are mostly determined by the lender and they may either be fixed or variable. Fixed mortgage rates remain constant all through the period of the mortgage whereas the variable rates vary as the benchmark interest rate varies. The mortgage rates are directly proportional to the rates of interest meaning that the mortgage rates rise and fall with the interest rates. A forecast of these rates will determine the willingness of the people to own homes on the mortgage basis meaning that the mortgages taken on fixed terms may increase in case the forecast predicts an increase in the interest rates meaning that taking a mortgage in future may be more expensive in the long run.

Five Year Average Predictions

Canada’s GDP is estimated to be $1.84 trillion and a per capita GDP of $40,600. The growth rate of GDP is estimated at +1.9%, according to 2012 estimates, meaning that the predicted GDP from 2014 to 2018 will be as follows, operating on the assumption that the 2014 GDP will range at the $1.85trillion mark: $1.88 trillion, $ 1.92trllion, $1.97 trillion, $1.99 trillion and $2.03trillion respectively. However, the annual average growth rate is expected to rise to 2.4% by 2018 (Statistics Canada, 2013). The inflation rate according to the 2013estimates from the bank of Canada ranges between 1.2% and 1.7% CPI. The low inflation rates are attributed to declining mortgage interest, agricultural prices and consumer prices.

The slower increase in regulated prices has also contributed to the same. The inflation rate is however expected to rise gradually to 2% by mid-2015 and even higher to stabilize at 2.4% by 2016 up to 2018. 10.8% of the population is below the poverty line but the unemployment rate is relatively low at only 7% having a labour force of 18.67 million people. As the economy starts picking up the unemployment rate is expected to reduce further as the workforce increases. The rate of unemployment according to the Bureau of statistics is expected to hit a low of 5.6% by 2016 and this will remain stable for the foreseeable future (Statistics Canada, 2013).

The interests rates have been fairly stable with low volatility remaining at an average of 2.9% and are expected to remain stable as the economy implements its economic plans for this fiscal year. The rates are expected to remain stable since the 5 year fixed mortgage interest rates are dependent on the 5-year government bond yields. It is also worth noting that 66% of Canadians have 5-year mortgage terms. As the Canadian economy picks up the economic analysts post predicts that 2016 may probably the period in which the economy will have gained full traction given that the political climate will remain tranquil as well as the general peace of the surrounding regions and major economic partners of Canada remain productive.

Conclusion

The economic variables are therefore important tools to that can be used to predict the future and therefore the nation’s economy can be checked by constantly observing the trends of change of the per capita GDP, the inflation and interest rates as well as the unemployment rates.

On a global scale, technology has made the world a global village and the information transmitted through the internet moves fast across the globe. For any nation to have a competitive advantage in the global market it cannot operate ignorant of the macroeconomic tools to know the fate of the nation’s economy through making well-calculated predictions using the principle of prudence, which is allowing room for the worst case scenario while hoping for the best.

References

Statistics in Canada. (2013). Canadian economic observer: Ottawa: Statistics Canada

Easterbrook, W. T., & Aitken, H. G. J. (2001). Canadian economic history. Toronto: University of Toronto Press.

Samuelson, P. A., & Nordhaus, W. D. (2005). Economics. New York: McGraw-Hill.

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